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Investment Recovery 201
By Michael Lawrence
Corporate Investment Recovery Programs
Every business eventually has items they no longer need. For some businesses
this may be machine tools, processing lines, and even complete plants, while for
others it’s overstocked inventory, end of life products, computers or vehicles.
Most everything that flows through the billion dollar purchasing channels and
supply chains of the world will some day be discarded or sold. In some
situations these items may be relatively new and still in original packaging or
recently installed, while in other cases the asset may be 50 years old and held
together by duct tape. Managing items when they arrive at the end of their initial
planned use is something that I, and others, call the Disposition Chain
Management. This function is also referred to as “Investment Recovery” or
“Surplus Asset Management”. By whatever name you call it, this is one of the
single largest overlooked areas for most businesses.
Think of all the technology, resources and effort applied to purchasing management. The
purchase of a $20,000 asset will likely involve certified purchasing managers, an RFQ, pre-
approved vendors, multiple bidders, advanced purchasing systems and a well structured
process to approve the purchase. If the $20,000 budgeted asset is purchased for $19,000
through these efforts the $1,000 savings is important and measured cost avoidance. Now
consider the sale of a used piece of equipment with a market value of $20,000. In many
company’s this task will be delegated to someone with little experience in asset sales. In
addition, there are few controls on vendors, no standard bidding process, and there may be no
formal approval processes for the transaction. So, whether the asset sells for $4,000 or
$30,000 or is scrapped there is no tracking, no performance incentive, and the investment
recovery that was lost or gained, goes un-noticed. Is there any other place in your company
where you could save, or lose $200,000 a month and not notice? It happens all the time, even
in otherwise well run companies. I’ve met with engineers who admit they scrap equipment
rather than have the company sell it because the feel it’s easier to scrap them. I’ve seen
companies sell assets for less than 5% of their current value, and on more than one occasion
buy the same exact item back at another plant for twenty times what they sold it for. And then
there is all the idle equipment that nothing is done with. Meanwhile companies pay taxes,
insurance and depreciation while its value disintegrates. If you don’t think these issues are
present in your world just walk the plant floor and talk to a forklift operator, open a few closets,
follow up on the next asset being written off and see what happened. I’m not talking about a
few hundred dollars here and there; I’m talking low hanging fruit that can make a difference to
the bottom line. If you look in enough places it will be there. In most cases it’s not that anyone
is doing anything illegal or even intentional, it’s just that the process is either not in place or
has issues.
Estimating the Opportunity
The used equipment industry is estimated at $100 billion a year so if companies are leaving
even 10% on the table, that is significant. In most cases it’s a lot more than 10% but this issue
still has not caught the attention of many CFO’s. For purposes of this article we’ll focus on two
areas, used asset sales and idle equipment. First, how much used or overstock equipment
did your company sell last year, and how much can you improve that. For most companies,
even many of those with an Investment Recovery department, the sale of used equipment is so
fractioned that this will not be an easy number to find or estimate. For most companies that
already have a central program, additional focus on Investment Recovery will bring an
improvement of 20% or more. For those without a central program, the improvement potential
can easily exceed 50%. The other area to consider is idle equipment. It is typically estimated
that 10% of the average company’s assets are idle. These are the items you see in the “bone
yard” at the back of the property, or equipment from a line no longer used, or an air conditioning
unit purchased but never installed, or the stack of used computers in the closet. In most
companies, it’s just out of sight, but everywhere. Take a conservative estimate of 5% of the
company’s capital assets and then assume you will get 40% of the book value. It’s not an
exact science but it should frame the size of the opportunity and it will likely have at least seven
figures.
For most companies there are sizable direct cash contributions, savings and cost avoidance that can be brought to the bottom
line through improved investment recovery projects. Beyond the money, it’s the legal matters that corporations also need to
watch. From environmentally friendly disposition to terms and conditions of sale to protect you from liability, these are critical
functions you need to be aware of. For example, let’s say a company decides to have a college intern, handle the sale of a
machine tool. They get top dollar from a factory down the road…but…the machine had alterations prior to sale that caused an
injury after the sale. Worse yet, the alterations were not documented and weak terms and conditions were used with the sale.
Can you say major liability exposure? The sale of anything, especially used equipment is full of legal pitfalls. If you have people
handling the sale of your assets, without the industry knowledge to avoid the major areas of exposure, you are opening yourself
to financial and public relations risk.
Change is coming
With the increased asset management requirements of Sarbanes Oxley, and added pressure from shareholders for efficient
management, I believe that we will see a change here in the next 5 years. Then consultants will be crawling out of the
woodwork touting total cost of ownership, disposition chain management, investment recovery, yadda yadda yadda.
Companies ahead of the game will be well positioned and those looking to catch up are going to find skilled resources difficult
to find. There are substantial benefits to establishing and supporting and effective investment recovery program today and it
should be on every company’s radar.
Resources to help
Because investment recovery has been such an overlooked discipline there are limited resources to help companies get
started, or enhance their investment recovery programs. A limited number of service providers, typically auction companies,
have added investment recovery services to their portfolio offering as a means to have more direct assets to their clients’
assets. There is also a trade organization that supports this function. This website has been established to provide resources
in support of investment recovery programs and will continue to add information about investment recovery best practices for
redeployment, asset sales, major restructuring sales, overstock sales and ongoing surplus asset management programs.
While it is being built out, feel free to contact us and we'll be happy to share some ideas for your particular needs.
Copyright 2006 ESPRE Partners, Inc.
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